For a while, many investors were wowed by the performance of Scottish Mortgage Investment Trust (LSE: SMT). Lately, that performance has been markedly less impressive.
Scottish Mortgage shares have shed 28% of their value over the past year. So could the former stock market darling be poised for a recovery? If so, might now be the time to add it to my portfolio?
Investment trust
The answer to that question requires an understanding of what exactly Scottish Mortgage is. As an investment trust, the company does not focus on running its own business selling goods or services, like Marks & Spencer or Sage might. Rather, it uses funds pooled by investors to buy stakes in dozens of different firms.
For a private investor like me, that offers a couple of advantages. It can provide exposure to unlisted companies in which I could not buy shares on the stock market. For example, Scottish Mortgage owns shares in SpaceX.
Additionally, the investment trust structure means that if I buy Scottish Mortgage shares, in one move I get exposure to a diversified range of investments.
Hunting for quality
However, neither of those advantages guarantee that an investment trust will perform well. Ultimately, that depends on exactly what it invests in.
Scottish Mortgage publishes a list of its holdings regularly, so an investor like me can know at any point what it owns. For example, in the past couple of years it has taken a big position in pharma giant Moderna.
Meanwhile, it has cut its stake in Tesla but still has a substantial holding. Indeed, one of the drivers I see for Scottish Mortgage shares having gone up 7% so far this year is the booming Tesla stock price. It has soared 98% since the start of the year.
Despite that, Tesla is still 30% lower than a year ago. Falls like that across its portfolio are why Scottish Mortgage shares have lost a similar amount of value over the past 12 months.
So what comes next? That depends on how well the trust’s current portfolio performs. If it has bought into strong growth stories at attractive prices, then in coming years that could boost the shares. Indeed, that could happen in 2023. But will it?
Should I buy the shares?
I think things could go well. There is a risk that further falls in tech share valuations could hurt Scottish Mortgage, which owns a lot of shares in that sector. It could also be that the fund managers’ choices perform less well than they expect, leading to Scottish Mortgage shares continuing to lag.
But, on balance, I think the trust’s proven strategy of hunting for young businesses with great futures could continue to serve it well. As it owns positions in dozens of firms, it only needs a few of them to perform brilliantly to turn in a positive performance itself. As the Tesla performance lately has shown, that could happen in 2023.
If I had spare cash to invest today, I would buy Scottish Mortgage shares for my portfolio.
